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Sunday, December 7, 2014

China's Now The Worlds Number One Economy

Below is from an article written by Brett Arends originally published in marketwatch.com on Dec 4, 2014

Hang on to your hats, America.
And throw away that big, fat styrofoam finger while you’re about it.
There’s
no easy way to say this, so I’ll just say it: We’re no longer No. 1.
Today, we’re No. 2. Yes, it’s official. The Chinese economy just
overtook the United States economy to become the largest in the world.
For the first time since Ulysses S. Grant was president, America is not
the leading economic power on the planet.
It just happened — and almost nobody noticed.

The International Monetary Fund recently released the latest numbers for
the world economy. And when you measure national economic output in
“real” terms of goods and services, China will this year produce $17.6
trillion — compared with $17.4 trillion for the U.S.A.
As recently as 2000, we produced nearly three times as much as the Chinese.
To
put the numbers slightly differently, China now accounts for 16.5% of
the global economy when measured in real purchasing-power terms,
compared with 16.3% for the U.S.
This latest economic earthquake
follows the development last year when China surpassed the U.S. for the
first time in terms of global trade.
I reported on this looming
development over two years ago, but the moment came sooner than I or
anyone else had predicted. China’s recent decision to bring gross
domestic product calculations in line with international standards has
revealed activity that had previously gone uncounted.
These calculations are based on a well-established and widely used
economic measure known as purchasing-power parity (or PPP), which
measures the actual output as opposed to fluctuations in exchange rates.
So a Starbucks venti Frappucino served in Beijing counts the same as a
venti Frappucino served in Minneapolis, regardless of what happens to be
going on among foreign-exchange traders.
PPP is the real way of comparing economies. It is one reported by the
IMF and was, for example, the one used by McKinsey & Co.
consultants back in the 1990s when they undertook a study of economic
productivity on behalf of the British government.
Yes, when you
look at mere international exchange rates, the U.S. economy remains
bigger than that of China, allegedly by almost 70%. But such measures,
although they are widely followed, are largely meaningless. Does the
U.S. economy really shrink if the dollar falls 10% on international
currency markets? Does the recent plunge in the yen mean the Japanese
economy is vanishing before our eyes?
Back in 2012, when I first
reported on these figures, the IMF tried to challenge the importance of
PPP. I was not surprised. It is not in anyone’s interest at the IMF that
people in the Western world start focusing too much on the sheer extent
of China’s power. But the PPP data come from the IMF, not from me. And
it is noteworthy that when the IMF’s official World Economic Outlook
compares countries by their share of world output, it does so using PPP.
Yes,
all statistics are open to various quibbles. It is perfectly possible
China’s latest numbers overstate output — or understate them. That may
also be true of U.S. GDP figures. But the IMF data are the best we have.